This article originally appeared on MacroBusiness on 4/7/18.
The Australian Bureau of Statistics (ABS) last week released its National Financial Accounts for the March quarter, which revealed a large 4.8% quarterly rise in Australian banks’ gross external liabilities (offshore borrowings), and a significant 9.8% increase over the year.
Bonds (+$24 billion) and One Name Paper (+$12 billion) drove the quarterly rise on offshore borrowings by the banks over the March quarter, partly offset by a $5 billion rise decrease in Deposits:
Over the year to March 2018, Australian banks’ offshore borrowings rose by $78 billion (+9.8%), with Bonds (+$38 billion) and One Name Paper (+$35 billion) driving the rise:
The surging growth in bank offshore borrowings over recent years has been driven primarily by Bond issuance, with growth in offshore Deposits and One Name Paper also strong. Both Bonds and One Name Paper are also pushing all-time highs:
When compared to GDP, Australian bank offshore borrowings rose to 48.2% of GDP in March, well below the December 2015 peak of 52.9% of GDP, but exactly the same as the pre-GFC peak. They also remain a key driver behind the banks’ loan books – mostly mortgages – which also rose to 200.3% of GDP as at March 2018, but was well down from the peak of 211.4% of GDP in June 2016:
As argued ad nauseum on this site, Australia’s banks would never have experienced anywhere near the same degree of asset (loan) growth without this tapping of offshore funding markets. Accordingly, the total value of Australian mortgage debt would never have grown so strongly, and Australian house prices would be materially lower as a result.
The banks’ heavy reliance on offshore borrowings to pump housing has also contributed to the long standing rise in Australia’s net foreign debt, which was 56% of GDP in the March quarter of 2018, albeit down from a peak of 62% of GDP in June 2016:
As always, the key risk for Australia remains that the banks’ ability to continue borrowing from offshore rests with foreigners’ willingness to continue extending them credit. This willingness will be tested in the event that Australia’s sovereign credit rating is downgraded (automatically downgrading the banks’ credit ratings), there is another global shock, or a sharp deterioration in the Australian economy (raising Australia’s risk premia).
The Federal Budget, too, is now hostage to the banks’ offshore borrowing binge as it cannot borrow to spend on infrastructure or other initiatives for fear that Australia will lose its AAA credit rating, potentially leading to an unraveling of the private debt bubble created by Australia’s banks.
Of course, all of this would be far less of a problem if these borrowings were used by the banks to fund productive investment. Unfortunately they haven’t. They have instead been used to pump-up the value of unproductive houses:
It’s a case of epic mal-investment that will cost the economy over the long-term: either through lower productivity growth or some form of banking crisis.
With credit now tightening following the banking royal commission, the whole system will be tested.